IMF calls on Bank of England to cut rates

IMF managing director, Christine Lagarde, and British chancellor, George Osborne, at Tuesday's press conference.

Story highlights

  • IMF calls on Bank of England to cut interest rates in bid to boost economy
  • Managing director Christine Lagarde said the BoE had been "nimble" in its responses
  • She added that economic recovery in the UK has not yet taken hold
  • IMF called on government to use its low borrowing costs to boost private sector investment
The International Monetary Fund has called on the Bank of England to cut interest rates and resume printing money to boost demand in the economy. It has also asked the UK government to prepare a Plan B for deficit reduction if these measures do not work.
In a tough assessment of the UK's economic prospects, the fund said the economy had not responded as it had hoped and risks of continued stagnation were high.
It said "further monetary easing is required" and should happen with more quantitative easing and a cut in the 0.5 per cent interest rate.
Christine Lagarde, managing director of the IMF, said in a joint press conference with George Osborne, the chancellor, that the BoE had been "nimble" in its responses, easing monetary policy to support growth.
However, she added: "Unfortunately the economic recovery in the UK has not yet taken hold and uncertainties abound.
"The stresses in the euro area affect the UK through many channels. Growth is too slow and unemployment, including youth unemployment, too high.
"Policies to bolster demand, before low growth becomes entrenched, are needed."
In the conclusions of its annual mission to the UK, the IMF also called on the government to use its low borrowing costs to boost private sector investment.
It suggested government guarantees of private sector borrowing -- as proposed last week by David Cameron, prime minister -- as well as buying groups of mortgage and business debt from banks. It said the UK should follow the eurozone in offering banks cheap long-term funding. This measure has been resisted by the BoE, which said it was unnecessary.
On deficit reduction, the IMF did not call for an immediate relaxation in fiscal policy, but said the government should consider slowing cuts in infrastructure spending and cutting money elsewhere -- public sector wages, for example -- where the effects were less severe.
In a message that will be difficult for the coalition, it added that if these measures failed, "fiscal easing and further use of the government's balance sheet should be considered if downside risks materialise and the recovery fails to take off".
In these circumstances, the IMF said "gains from delaying fiscal consolidation could be larger as multipliers are estimated to move inversely with growth and the effectiveness of monetary policy".
"Fiscal easing measures in such a scenario should focus on temporary tax cuts and greater infrastructure spending, as these may be more credibly temporary than increases in current spending."
Ms Lagarde said the risks of policy changes that might stimulate growth obviously came with risks, but she added: "These risks need to be weighted against the risk of lost years of growth. To this end, further monetary easing is required.
"Underlying inflation pressure is weak and such easing should be consistent with inflation returning to the 2 per cent target in a reasonable timeframe.''
Ms Lagarde said: "There are more tools that can be used from a monetary policy point of view and we have discussed that extensively with the Bank of England.
She said the IMF believed the BoE had quantitative easing measures available that could be resumed.
"We also believe that there is room in terms of interest rates that could be used as well."
She said that cutting taxes, possibly temporary adjustments in VAT rates or national insurance contributions, would be fourth choice in the IMF's wishlist for measures the UK could adopt.